To Defend or Not to Defend? Northern District of Ohio Provides Guidance for Determining Whether to Defend an Arbitration

While the rules for determining whether a liability insurer has a duty to defend a lawsuit are generally well-known, questions can arise when an insurer is asked to defend an arbitration. For example, can an insurer’s duty to defend be determined by looking solely at the initial request for arbitration even if that document is not required to fully clarify the claims asserted and damages sought? According to the Northern District of Ohio’s decision in Maxum Indemnity Company v. Robbins Company, No. 1:17-cv-1968 (N.D. Ohio Mar. 22, 2018), the answer to that question is yes.

A Request for Arbitration Results in a Request for Coverage

Maxum Indemnity Company (“Maxum”) insured The Robbins Company (“Robbins”), a tunnel-boring machine supplier, under a primary commercial general liability policy that covered Robbins’ liability for “property damage” caused by an “occurrence.” Robbins sought coverage from Maxum when one of its clients, JCM Northlink, LLC (JCM), filed an arbitration against it in the International Court of Arbitration. In the request for arbitration, JCM claimed it suffered more than $40 million in damages due to (1) defects in a tunnel-boring machine JCM rented from Robbins; and (2) Robbins’ failure to perform certain services under its rental contract with JCM. However, JCM was not required to clarify its claims and damages in the underlying arbitration until a later date, possibly as late as the final arbitration hearing.

Using Request for Arbitration to Determine Duty to Defend

Maxum sought a declaratory judgment that it had no duty to defend or indemnify Robbins in the underlying arbitration. In a motion for judgment on the pleadings, Maxum argued that it had no duty to defend because the policy did not cover the claims asserted and damages sought in JCM’s request for arbitration.

In opposition, Robbins argued that the district court should not rule on Maxum’s motion until the underlying arbitration claims were “clarified sufficient for a coverage determination to be made.” In support of this argument, Robbins relied on Willoughby Hills v. Cincinnati Ins. Co., 459 N.E.2d 555 (Ohio 1984), in which the Ohio Supreme Court held that the duty to defend “may arise at a point subsequent to the filing of the complaint.”

However, the district court rejected Robbins’ argument. The district court explained, “Willoughby Hills ‘does not stand for the proposition . . . that coverage may arise after the filing of the complaint where the pleadings did not create even an arguable basis for coverage.’” As a result, the district court determined that it could enter judgment declaring that Maxum had no duty to defend if JCM’s request for arbitration did not even “arguably trigger coverage.” The district court ultimately did just that, granting Maxum’s motion and finding that Maxum had no duty to defend. At the time of the district court’s ruling, the underlying arbitration was still pending.

District Court’s Coverage Analysis

The district court found that Maxum had no duty to defend the underlying arbitration for three independent reasons.

First, the district court held that JCM’s request for arbitration did not seek to recover for “property damage,” which the policy defined as “[p]hysical injury to tangible property, including all resulting loss of use of that property . . . or [l]oss of use of tangible property that is not physically injured.” In its request for arbitration, JCM alleged that the defects in the tunnel-boring machine prevented JCM from moving forward with a tunneling project such that JCM’s other equipment at the project site sat idle. Robbins argued that these allegations qualified as “loss of use of tangible property that is not physically injured,” but the district court disagreed.

Second, the district court found that there was no coverage because the policy excluded “coverage for property damage ‘for which the [i]nsured is obligated to pay ‘damages’ by reason of the assumption of liability in a contract or agreement.’” The district court indicated that this exclusion would bar coverage if the request for arbitration sought damages that were “contractual in nature” but the exclusion would not apply if the request for arbitration sought “consequential property damage.” The district court ultimately held that the exclusion barred coverage because JCM’s request for arbitration “clearly characterize[d] [JCM’s] claim for damages as one which sound[ed] in contract.”

Finally, the district court held, without explanation, that coverage was also barred by the policy’s “exclusion for damage relating solely to a contractor’s own work.”

The district court’s holding affirms that, under Ohio law, a request for arbitration – like a complaint – must demonstrate at least an arguable basis for coverage for an insurer’s duty to defend to be invoked.

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